On The Brink with Castle Island - Weekly News Roundup 08/21/20 (Another Bitcoiner in the Senate, Kraken pursues the Wyoming SPDI, autoponzis) (EP.115)

Episode Date: August 21, 2020

Nic and Matt cover deals and the news of the week. In this episode:  Hawaii announces the Digital Currency Innovation Lab Wyoming's Senate nominee Cynthia Lummis is a Bitcoiner Why Bitcoin values are American values How Bitcoin is mutualistic with the US dollar Evidence that Tether is used for capital outflows from China Kraken creates Kraken Financial to pursue the SPDI in Wyoming Warren Buffett buys gold Our explanation of a new breed of ponzis Where DeFi is and is not compelling to us

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Concentive Easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And you are actually recording from an office for once. I am in a WeWork. And we've already had a lot of technical difficulties.

So I don't know if it's the WeWork or what. But, you know, I'm the only one on this floor. So there might be an echo. At least you can salvage the experience with a beer from the WeWork. beer cab no so no beer so there's nothing here so there are barely any humans on this block first of all and there's no humans on this floor which is fine very safe but there is no beer so i think the beer left with adam newman when that whole thing ended that's cruel that was the day the fun died at we work yeah i mean i kind of wish i was there for the for the fun times but you know it is what it is the

The podcast goes on. Yeah. So today's episode, by the way, is brought to you by CASA, which is one of our portfolio companies. So, you know, let's be honest. You're probably custody in your Bitcoin on a ledger with a piece of paper with 24 words scrawled on it, which is honestly not the best idea. Kasa lets you use Bitcoin's native multisig capacity to split up your exposure and to hold

it yourself. So it's the easiest and safest way to do that. They've one of the most respective teams in the industry, really amazing design and support. We know the whole team over there. They're extremely committed to client support. They also offer Bitcoin inheritance planning and white glove support for large Bitcoin purchases. And now you can buy Bitcoin directly into CASA. So you can have your setup and buy Bitcoin directly into that multi-sick setup without having

go to an exchange. So if you want to get started with a membership for 10 bucks a month, you can use the code Castle to get 10% off and head over to keys.casa to do that and get some peace in mind. That buy Bitcoin feature is very, very cool. It's very easy to buy Bitcoin, almost too easy. Yeah. Yeah, buying directly Bitcoin into a hardware wallet setup is pretty awesome. It is pretty awesome. So we had a busy week with podcasts this week. Yeah, we had Zach Prince on. Of course, BlockFi raised their big series C, so that was the news of the week.

And so we had Zach Prince on to talk about their traction, which is staggering, just the hockey stick and all of their figures. And also whether he considers Defi to be a competitor. And I also liked his answer on why the. interest rates are so high on stable coins, why they can offer structurally high interest rates on stable coins. I thought it was great answer. Yeah, Zach is a repeat guest on the podcast, and he's amazing. I was thinking today about, do you remember when Zach sent out the investor update, maybe two or three days after the big crypto market crash and the equity markets had just crashed in March? And he said there may be a recession, but we're choosing not to participate.

And it turns out they did not. They are definitely not participating. Yeah, those are a strong claim at the time, but in hindsight is absolutely true. And not only do they not participate in the recession, but they absolutely thrived through it. And yeah, they're hiring like crazy too. So if you're listening to this podcast and you're interested in getting into the crypto industry, definitely check out Block 5 for Open Rex. They are growing like crazy over there.

Yeah. And one thing Zach said on our podcast is you don't know. need to be a crypto native to work for BlockFi. They're happy to hire people that aren't necessarily, it might be their first job in the crypto industry. So they will onboard you into crypto world. They will. They will. So that was a fun episode. We released that Thursday. And you did an episode with Kyle Powers, who's from Liberty Pay, the co-founder of Liberty X. And Liberty Pay is obviously the remittance subsidiary. So I thought that was a terrific episode. Yeah, I've been badgering Kyle to do an episode for a really long time at this point. So I'm glad that I finally got him to capitulate.

But yeah, Liberty Pay is such an underrated business. And it really says a lot about the heterogeneity of different ways that people use Bitcoin. They use it to settle remittance transactions with end users never really knowing that Bitcoin is powering that whole thing. And I think there's a whole breed of startups these days that's emerging that's doing this kind of thing. So it's a great story. And also their origin story is amazing. So Kyle and Chris dropped out of Warden MBA to start a Bitcoin ATM business and they wheeled a physical Bitcoin ATM into South Station. And then because they couldn't really keep it there, they kind of stood watch next to the ATM and like told people how to use it and kind of taught people about Bitcoin on the street.

Yeah, there's no better way, no better way to learn about your customers. Obviously it changed a lot after that and now, now they make software that goes in regular ATMs that you can use to buy Bitcoin and they have the remittance business. But humble origins, you know, it's kind of an amazing story. Yeah, these guys really grinded and, you know, they haven't raised a ton of venture money. They're, done it really through, and Kyle talked about this on the podcast, they've really done it through just growing revenue over time. It's kind of the grow the old-fashioned way. Yeah, I guess that's, that's the thing that you can do. You know, you don't have to take VC money necessarily. That was the

same with with Paxville. They never raised a dollar from VCs. So we kind of a trend on our podcast lately. Yeah. So check that episode out. And Kyle also said that he listens to this episode. So obviously that makes me really happy that people are listening. It's all. it's nice when their podcast guests are also listeners. So let's talk about the state of Hawaii news. Did you see this this week? Yeah, this was pretty interesting. So they announced that they're creating the digital currency innovation lab,

which could potentially allow crypto companies to operate in the state without a money transmitter license. And in fact, three of our portfolio companies are in the inaugural group here. So that's pretty exciting. Yeah, so BlockFi Erasex and River Financial are part of the inaugural group. And so this is being kind of celebrated, but actually the bigger news here is just how antiquated Hawaii's money transmission licenses are in their whole kind of approach to the industry. So it's important to point out that really no cryptocurrency companies have been operating

in the state of Hawaii for I'd say at least a couple of years. And the reason is that as part of their local licensing regime, they require a two to one reserve ratio for any cryptocurrency deposits on the platform. So think about that. If a user put $10,000 worth of Bitcoin onto a service that operated out of Hawaii, then they would require the company to hold $20,000 in U.S. dollars as a reserve against that balance. And obviously if the price of Bitcoin goes up, then you have a two to one ratio the whole way up. So it just becomes an incredible balance sheet burden. And it's really just inert capital sitting there. So it is just the dumbest law ever.

And it's great to see that they're establishing the sandbox. But what they really should do is just change the law. That's crazy. It's also crazy to me that this, I mean, I guess that's the whole point of American federalism, but that the states have such disparate approaches to money-transmitter regulation. Although the upside is that there's some very progressive states which totally get it, one of which is Wyoming, of course, we keep talking about Wyoming. They keep coming up.

They keep doing pretty interesting things. Yeah, and it might have even been Wyoming that, you know, if you roll back the clock five years ago, had something similar to this, It might be wrong about that, but it was either Montana or Wyoming that at one point had some notion of a reserve requirement. And effectively, this just says, hey, startups don't do business here. And it's unfortunate for the folks that live in these jurisdictions. I mean, if you have been living in Hawaii over the past few months, you just, what are you going to do? You can't do anything.

So there is some interesting, speaking of Wyoming, the U.S. Senate candidate who just won the primary on the, Republican side is apparently a bitcoiner, which is pretty cool. Yeah. And did you see that her son-in-law works for Unchained Capital? Yeah, and he was apparently the one that Orange pilled her in the first place, which is awesome. So Cynthia Loomis, who's effectively a shoe-in for the Senate now because she won the primary and it's a strong kind of Republican stronghold, has apparently held Bitcoin since 2013. and she completely gets it.

She gave a great interview with CoinDesk. She'd be the second overly pro-Bitcoin female senator, along with Kelly Loeffler. Yeah, so our numbers are growing in the Senate. Oh, it's great news. So Will Cole is her son-in-law. There are a couple phenomenal quotes in that interview. I don't know if you had a chance to fully read it,

but she talks about being a budget and deficit hawk. She talks about U.S. just printing money and scarcity by principle being a really compelling thing. She says, I am a hoddler. I've never sold. I was and am a buyer. Clearly, she understands this technology and sees it as a savings technology. The thing that I like about that is that, you know, it's kind of a reminder that Bitcoin

values are American values, you know, like autonomy, privacy, individualism, self-determination, a strong respect for property rights. Those are core constitutional American values. And Bitcoin enshrines them. Obviously, it doesn't say anywhere in the Bitcoin white paper, you know, that Satoshi really liked the founding fathers or whatever. But, you know, I think when the final calculus is in, the U.S. is going to end up being a much friendlier jurisdiction for Bitcoin than a bunch of authoritarian or socialist countries

will be. Yeah, because Bitcoin allows individuals to protect themselves, whether it's from corporal, interest or from the state. So it's no surprise that the Bitcoin industry has its seat in the United States as opposed to anywhere else. Yeah, and there's obviously a ton of innovation happening in other jurisdictions, but if you think about the types of regimes that are really threatened by a public blockchain network, it's the authoritarian regimes. It's the places where you have people in the country that want to get wealth out of the country and want to be able to store their wealth in a self-sovereign manner. And so what better than a public blockchain-based asset that you can walk

across a state line, walk across a country line with a passphrase just memorized in your head. It's not like walking across with a bar of gold in a backpack that's going to be confiscated. And, you know, we're starting to see these Craigslist style services like Paxful and local bitcoins. They're just making it more and more easy to, you know, to do this type of stuff. So I agree. I think it's a pro, it's a Western innovation at this point. There's some interesting coverage in Bloomberg today of some work that chain analysis did saying that they found or claimed that there were $50 billion worth of capital outflows from China

that were mediated through the vehicle of cryptocurrency chiefly tether. So clearly, and we kind of already anecdotally knew this, We knew that there are those big OTC, renminbi tether markets out there, which is clearly a way to facilitate capital outflows. So this is just more confirmation of the fact that, yeah, I mean, part of the whole value proposition here is routing around oppressive governments. And some people may not like that about the industry, but that's one of the things that it's really for. Now, the kind of problem with some of this, though, is that this only works to the extent that the internet works. And so these oppressive regimes can certainly make attempts to shut down the internet and make it easier for people to find each other and to do these in-person transactions. In North Korea, I guess, would be a great example of this.

You know, the great firewall is to some extent probably been successful in halting some of this commerce. But it would be great if we got to a point where there was a, you know, an internet solution to this, so to speak. Yeah, I think Nick Zabo talked about shortwave radio as a way to potentially broadcast Bitcoin transactions. But a lot of that stuff is still kind of sci-fi. But I guess the point is, you know, some American policymakers have made a song and dance

about Bitcoin's threat to the dollar. But our view has always been that the threat is to the weakest currencies and the dollar being probably one of the strongest global currencies has nothing to fear. And it honestly only stands to gain from the growth of cryptocurrency. There's $15 billion worth of crypto dollars out there now. What's the saying I keep on botching? If you're at a picnic with a bunch of people and a bear comes running at you, you don't necessarily have to outrun the bear.

You just need to outrun whoever you're at the picnic with. It's like that's for Bitcoin and it's just running at the campers. Yeah, that's like the worst formulation of the phrase ever. But yeah, you guys get the gist. You get my drift as the U.S. as the strongest currency. Let's build on the Cynthia Loomis story and talk a little bit about what was happening today with the speedy hearing. Yeah, so this is really interesting. So Wyoming's financial services regulator, I believe, had a hearing with Cracken, actually.

There's a new entity called Cracken Financial, which is going to be domiciled in Wyoming. And they're going to attempt to obtain the special purpose depository institution license, which is the new law, which has been passed in Wyoming in the last year or so. And they're going to do business in that state under those rules. And they were having their initial hearings and answering questions from the legislators today, which is pretty cool, especially because the guy that's in charge of Wyoming of Cracken Financial is David Kinnetsky, who's our former colleague at Fidelity. Yeah, he was all dressed up in a suit.

Usually, you know, he's like a black t-shirt guy, but he looked sharp. Marcus and Tori was there as well. It's still going on, actually. So it's the Wyoming Division of Banking hearing. Cracken would be the very first company to get one of these special purpose depository institution licenses. and it's been really interesting to watch. So Marco has been kind of asking a lot of questions. He's been directing a lot of it.

There have been some really informed questions from the folks on the board itself, the board of governance, whatever it's called. But, you know, Wyoming. Talk about being at the forefront. Yeah. And the Financial Services Committee really seemed to understand Bitcoin as well, which is great. But yeah, I think the point of this legislation is to allow businesses to establish effectively full reserve custodial institutions,

so not fractional reserve. So it's mandated that they hold client deposits on full reserve and they operate effectively as narrow banks, which is pretty interesting. But the innovation would be that they would have access to the federal reserve discount window as well as being crypto custodians. Yeah, so non-FDIC insured, but having access to the Fedwire payments, It would, you know, I think it would be the first bank, you know, to have that.

So I hope this goes well. It's still going on. It's been going on most of the day. And by the way, Cracken is hiring for that outfit. So if you want to move to Chene, Wyoming and work on some pretty cool cutting edge stuff, they're hiring. I think I might want to, actually. I might want to move out there. Have you seen the show Yellowstone yet?

No, I haven't. It's phenomenal. It's Kevin Costner just at his best. Every day there's something new that makes me want to move to Wyoming. It's crazy. You watch this show and you're definitely going to want to move to Wyoming. I don't know how willing they would be to accept a bunch of coastal folks like ourselves. So if you're Wyoming in, hit me up, let me know.

Are people in Wyoming welcoming to coastal big corners? Well, you're a hard worker. it's a hardworking state. You'd have to get out there, work on the land a little bit. But you've got that in you. All I know is that that's where Dick Cheney is from. Oh, well, I know a little bit more than that. I guess there's bison out there as well.

It's a great place. I've been before. It's phenomenal out there. And they keep on staying at the cutting edge of the crypto scene. So we'll see. Hopefully we have more updates on this. Obviously, Caitlin Long has been on the podcast in the past, talking about Avanti. And I think we're going to start to see more and more.

jobs created in this jurisdiction. So it's exciting to see. Yeah, and check out that Kayla not long episode. She explains, I go through all of the Wyoming legislation with her, and she explains it in a really comprehensible way. Definitely worth listening to. One of the things I wanted to get your take on this week was Warren Buffett. So not specifically about Bitcoin, but Warren Buffett bought some Barrett Gold this past week, or at least disclosed that he held some. So it looks like Berkshire, Hathaway, has acquired $563.6 million worth of stock in Barrick gold. And what do you make of this? I mean, Warren Buffett has historically not been a gold bug. Yeah, he's historically disparaged gold and said that he believes in productive assets and not inert assets effectively.

He's even said that he thinks it's silly that we dig up gold from the ground and then we put it in other holes in the ground, which is kind of a funny and reductive wave of putting it, which signals to me that he never really understood that a certain sector of the population or of like the world's capital assets has a mistrust of capital assets, which ultimately come down to guarantee, property guarantees by the state. And this is a significant change. She's never really bought gold or anything that's kind of a derivative of the price. a gold like a gold miner is. I would say that it's very possible that it wasn't Warren himself that made this decision. He's got two assistants that are a bit more open-minded. You know,

Berkshire bought Apple stock in the last couple of years, and Warren Buffett's never been a Apple guy either. So it could be that there's just a fundamental change happening at Berkshire. But it could also mean, regardless, I think it signals that they're really concerned about inflation to the extent that the broader market is not taking into account yet. I mean, that's that's the obvious interpretation. Yeah, and the headline was that in addition to acquiring these Barrett gold shares, they sold off a bunch of bank stocks. So take that for what it's worth. But that's big news where where I'm concerned. Yeah, I mean, think about if you imagine there's going to be negative interest rates for the foreseeable future, banks suffer in a negative interest rate ratio. They,

can't really carry out their core business. And negative interest rates also confiscate wealth from savers. And gold has a zero interest rate, but that's better than negative. So it looks better by comparison. So negative interest rates just destroy finance. And I like how Joe Wisenthal talks about stocks versus gold. Whenever gold goes up, he says the rock is winning. And when stocks goes up, you know, that's a bet on civilization and people. He's always disappointed when inner commodities go up. But unfortunately, we're at a time where they're starting to look more and more attractive. Well, we have a big treat on Monday.

So I recorded an episode yesterday with Dick Beauvais, who's one of the foremost experts on the banking sector, has been covering it from an equity research perspective for 52 years, which is a long time, obviously. And we had a really fun conversation, talked to all sorts of stuff, but talked about the banks, how they're situated. He has some really interesting perspectives on that. Actually thinks that COVID in a lot of ways has benefited the banking sector. And then we talk about Bitcoin, not surprisingly, he was recommending that folks look into Bitcoin in 2013 when it was $50. He had a famous call. So he's been really at the forefront.

All right. So one thing that I did want to get your perspective on this week was it has to do with yams. And so this is the part of the podcast where some folks are going to start to think that we're speaking in a completely foreign language, and that's all right. So Yams is a decentralized finance project that has received a lot of attention over the past two weeks. Can you set this up for the folks in the audience and exactly what is YAM? Yeah, Yams is basically it's very similar to Amplforth. Ampleforth is ostensibly, or in theory, a stable coin, or it's meant to target a stable evaluation. and it does that by maliating the supply to try and keep the price stable. So if the price goes up, the supply increases and vice versa.

In practice, it doesn't really seem to work very well, but that didn't stop people speculating on it. So Yams is effectively a relaunch of that idea with some governance elements thrown in. And it's basically an opportunity to speculate on a stable coin, which is kind of new. You know, I mean, previously, if you bought a stable coin, you weren't expecting its value to go up

because that's not the point. So this is a fun mechanic that people like. It's no different from any old cryptocurrency where you speculate on the price going up and it doesn't really have any intrinsic usage or reason to exist. Just in this case, it happens to be packaged up in a stable coin model.

So Hasu is basically saying, this fits the description of a Nakamoto scheme, which basically means effectively a Ponzi scheme where, you know, it's a zero-sum game and late investors pay early investors, but crucially it's one where there's no single orchestrator. There's nobody managing the Ponzi. This was a term that Preston Burn came up with a long time ago to describe these kind of auto-ponzes that exist in the crypto industry. And this isn't really a pejorative necessarily. It's just a descriptive term. So Hasu is describing Yams as a Nakamoto scheme. That's a pretty interesting article.

Definitely recommend it. How would you explain some of these projects like Yams to folks that are more in the institutional set? How do you characterize them? Do they matter? Should anyone care from that perspective? Well, I would say they matter in as much as they prove that the Ethereum-specific trading infrastructure, which happens a decentralized way. through these automated market makers, which obviously doesn't require KYC,

they prove that that workflow is very compelling to lots of people. And it's more compelling than the standard KYC centralized exchange model. And in many people's eyes, it's far superior because it's truly permissionless. But then if you actually look at what these people are trading, a lot of the times, it's like really marginal stuff like yams. So the assets themselves that are being speculated on are not really worthwhile, but the way that people are doing the speculation is really interesting and probably heralds a new era of dexes as opposed to centralized exchanges,

which is noteworthy. I think that's exactly right. So I think the innovation here is really just a trading technology that is in its infancy. But it's probably more than a trading technology, right? It's trading technology coupled with a non-sovereign value type of thing. So it's a money innovation. And it's also a governance innovation. So these are not centrally controlled system.

So you sort of have three, at least three, really interesting things happening at once. And right now it sort of just looks like, you know, it looks like a hobbyist thing. It looks like people in a garage just tinkering with stuff. But I guess what gets people excited is that, you know, This could go in a lot of different directions. Yeah, I think the whole stack has been, there's kind of a whole stack. So you have the reserve asset, which is typically Ethereum. You have the ability to hedge into stable value assets.

There's lots of stable coins now. There's execution, clearing, settlement. This all happens in these interlinked kind of smart contract protocols. And, you know, fundamentally I think Dexes are probably better as far as key loss is concern because you're not really consigning your coins over to some third party for a long period of time. It doesn't have to say that there aren't bugs in defy, but clearly this workflow is more attractive for a lot of retail traders than the standard centralized exchanges. And I don't think that is going away. I think that is going to become entrenched. That's just going to

become a feature of the crypto markets. I guess my hope is that there are less marginal assets, which eventually become tradable on these things. One thing that I know for certain is going to start happening here is that just really smart people are going to start to find interesting ways to break some of these things. And so if you think about the, you know, think about Michael Lewis and Flash Boys, that book and just all of the innovation that happened around just being a fraction of a second

faster on centralized trade execution and the people that can game those systems and all sorts of capital expenditures to do so. We're really at a very small level in terms of total assets in these systems, but as they start to grow, you're starting to have almost a bounty effect where you're just going to have some smart people start to try to break these things all day. And people have said this, but it's for the first time in history almost, that there's actually no capital requirements to conduct some of these exploits because you can take out a flash loan and pay it back in the same block.

So you can get margin, which is paid back instantaneously as far as Ethereum is concerned, but do a whole bunch of moves in the duration of that transaction, which maybe are represented arbitrage. So that is like truly new. I don't think there's ever been a concept analogous to flash loans that has existed before, which kind of blows my mind. It means that anybody with very limited resources can can start arbitrage in these different contracts.

And I don't think that we're talking about something illegal here. I think you're talking about a world where, you know, I'm looking forward to reading the book in 10 years about the 14-year-old today who's just trying to figure out some of this stuff and ends up being worth $100 million by the time it goes to college. You know, like that type of stuff is going to start happening. Yeah, I don't think it's a question of legality or not. I think it's going to take the laws a long time to catch up to what's actually going on here. So Wild West type of stuff.

I did want to call out a couple of good podcasts. We don't usually call out podcasts anymore because you don't like to pump the competition, but we had some good podcasts on other networks this week. All right. What we got? So David Chom, founder of Digicash and Adam Back, founder of Blockstream, appeared on Unchained. This one was really funny because David Chom started to get a little bit contentious with Laura Shinn.

There's definitely some tense moments. I thought she did a good job of keeping it on track. But David Chom likes Bitcoin but thinks that there will be something better on the horizon. Obviously, Adam Back is focused on improving Bitcoin. But there's some interesting tension there. Wasn't David Chom involved in something called Elixir, which was potentially a Bitcoin killer? Yeah, he has a rival cryptocurrency. They didn't talk about that on the thing, but that was good.

And then the founders of River Financial, Alex Leashman and Andrew Benson, so River is one of our portfolio companies. They went on Marty Bent's podcast and talked to Marty and Matt O'Dell. And that was a really good episode as well. Let's give a quick shout out to the fact that you can use your hardware wallet with River now, which is pretty dope. That's not widely released, but we are in the beta test group and it's awesome. Yeah. So you can monitor the contents of your treasur, ledger on their app, on their kind of desktop client.

And you can also withdraw directly once you establish that connection from your account on river to your hardware wallet, which is pretty dope. I got to say, it's awesome. Yeah, you talk about just pleasing user experiences. That was a really good one. That was the sleekest thing I've seen in a while. And it goes to show the kind of things you can accomplish when you are a Bitcoin-only financial institution. You know, people think the concept is crazy.

But guess what? There's a bunch of Bitcoiners out there that only care about Bitcoin and they care about these high-quality experiences. Yeah, there are some funny anecdotes in that podcast where they were talking about some of their clients or the types of folks who are buying, you know, like $50 million worth of Bitcoin at a pop. So there's there are some folks out there that are hardcore. Yeah, that's kind of the niche river is targeting a little bit is kind of, I mean, everyone, but in particular high net worth individuals that maybe need a little bit of handholding, need that kind of white glove concierge service. That's definitely something they're kind of equipped to deal with.

All right, so I think that's everything for the week. I hope everyone has a great weekend. We're going to be back on Monday with an episode with Dick Bavet, a few podcasts next week, actually. Yeah, we have an interesting one on a centralized exchange coming out as well. Keep an eye out for that. Hope everyone has a great weekend.